PC Connection, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2016; comparisons are with the third quarter and first nine months of 2015. Unaudited consolidated financial statements. PC Connection is an IT solutions reseller and services provider serving SMB, large-account, and public-sector customers.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $708.5m | $680.8m | $1,957.0m | $1,889.7m |
| Gross profit | $97.0m | $88.6m | $273.0m | $249.2m |
| Gross margin | 13.7% | 13.0% | 14.0% | 13.2% |
| SG&A | $74.5m | $66.7m | $214.4m | $193.5m |
| Operating income | $22.4m | $21.9m | $58.6m | $55.7m |
| Operating margin | 3.2% | 3.2% | 3.0% | 3.0% |
| Net income | $13.6m | $13.0m | $35.1m | $33.2m |
| Diluted EPS | $0.51 | $0.49 | $1.32 | $1.25 |
- Q3 sales rose 4.1%; nine-month sales rose 3.6%. Q3 gross profit increased 9.5%, while SG&A grew 11.7% and rose to 10.5% of sales from 9.8%. Nine-month SG&A increased 10.8% and rose to 11.0% of sales from 10.2%.
- For Q3, SMB sales increased 12.5% to $302.4m, Large Account sales fell 3.7% to $233.8m, and Public Sector sales increased 1.8% to $172.3m. For nine months, the respective sales changes were +8.6%, +1.4%, and -2.0%.
- Software represented 21% of Q3 sales versus 15% a year earlier. Management attributed stronger margins in SMB and Large Account largely to software and product/customer mix; Public Sector Q3 margin edged down.
- Effective tax rates were 39.4% for Q3 and 40.0% for nine months. Interest and other expense was modest.
Cash, liquidity, and debt
- Nine-month operating cash flow was $39.8m, compared with $25.3m in 2015. Investing cash outflow was $42.7m, including $34.0m for Softmart and $8.7m of capital expenditures. Financing cash outflow was $10.4m, including a $10.6m special dividend ($0.40 per share).
- Cash declined $13.3m from year-end 2015 to $66.9m at September 30, 2016. Accounts receivable was $358.0m and inventory $102.0m; accounts payable was $159.6m. Days sales outstanding were 42, versus 40 a year earlier; inventory turns were 23 in both periods.
- No bank borrowings were outstanding. The company had $66.9m cash and the full $50.0m revolving credit facility available; it may be increased to $80.0m for approved purposes. The facility is secured by receivables, expires February 24, 2017, and renewal discussions were underway; management expected substantially similar terms.
- Trade-credit arrangements finance specified inventory without interest or discount fees to the company. $26.9m owed under these arrangements was included in accounts payable. Stockholders’ equity was $428.8m; the minimum-net-worth covenant threshold was $346.7m at quarter-end, and the company reported compliance.
Material changes, outlook, and risks
- Softmart acquisition: Acquired substantially all assets on May 27, 2016 for $34.0m, including $16.2m goodwill and $11.3m customer relationships; included in SMB. The preliminary purchase allocation remained subject to final valuation and working-capital adjustment. Q3 sales included $42.0m attributable to Softmart, according to management.
- Subsequent acquisition: On October 11, 2016, the company acquired GlobalServe for $11.9m, intending to add a global procurement and service-management platform for multinational customers.
- Outlook: No specific revenue or earnings guidance was provided. Management expected sufficient operating cash, cash on hand, and available credit for at least the next 12 months. Expected capital expenditures were $10m–$12m over that period; a potential IT systems project could require more than $20m over the next one to three years.
- Management cited priorities and risks including revenue and margin improvement, sales-force recruitment and productivity, controlling SG&A while investing in advanced solutions and IT, technology change and inventory obsolescence, vendor dependence and direct-sales competition, and fluctuations in IT demand. Advanced-solution hiring and IT investment may increase costs before related revenue benefits materialize.
- A multistate unclaimed-property audit remained in progress. Management believed known and estimated liabilities were adequately provided, but said the ultimate outcome was uncertain and additional assessments could materially adversely affect results, financial condition, or cash flows. Other ordinary-course legal matters, including patent claims, were not expected by management to be material.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material change in market-risk exposure was reported.
Most important facts for investors to verify
- Whether the Softmart acquisition’s preliminary valuation and working-capital adjustment are finalized, and how the acquisition contributes to SMB growth and margins.
- Whether the February 2017 credit facility is renewed on expected terms and whether GlobalServe produces the anticipated customer and operational benefits.
- Whether higher SG&A, planned IT spending, and advanced-solution hiring translate into sustainable sales growth and operating-margin improvement.
- The outcome and potential financial exposure of the unclaimed-property audit, and the company’s continued compliance with credit and trade-credit covenants.
- Cash conversion and working-capital trends, particularly receivables collection, payable levels, and the increase in days sales outstanding.